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On industrial policy and free trade

on Nov 28, 2013 at 12:00 AM Posted by Roy Culpeper

The current debate over the proposed Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU typically pits “free-traders” against “protectionists”. Free-trade proponents are depicted as those who accept the alleged benefits of globalization — more jobs for everyone, lower consumer prices and more consumer choices. Protectionists, on the other hand, are characterized as those who oppose any trade and want to preserve today’s jobs and consumer choices at any cost.

Framing the issue in these terms, however, is no longer meaningful. The debate has moved on, thanks both to the work of certain economists, as well as the experience of a number of Asian countries that have pursued different policies.

The economics literature of the past thirty years — including contributions from economists Barbara Spencer and James Brander from UBC, as well as Nobel Prize-Winner Paul Krugman — has suggested that government subsidies or trade barriers can help support strategic trade objectives, including capturing export markets.

Moreover, the debate is no longer about trade pure and simple, if it ever was. The underlying issues have always been: what will my country produce, using the domestic market as a base and looking to export markets for expansion? How many and what kinds of (decent, well-paying) jobs will these industries yield for our citizens?

In other words, what industrial policy should we pursue that best fits our human and natural resources, our opportunities and constraints?

Unfortunately, the media have chosen to focus narrowly on the implications of trade agreements for the consumer. So in the proposed agreement with the EU, for example, consumers will benefit from a greater selection of European cheeses and wines, lower-priced BMWs, and so on. What is being downplayed is the fact that some workers will indeed lose their jobs, as many typically do when trade agreements allow globalized firms to source their products from around the world. And let’s not forget, moreover, that CETA comes with its own protection for patents on brand-name drugs — which will cause drug prices to rise. These are trade-offs that should be highlighted by government and discussed openly with the public.

But the debate is not just an intellectual one, featuring economists brandishing complex models that few outside the profession can understand. The truth of the matter is that active industrial policy is exactly what the dynamic East Asian economies (China, South Korea, Taiwan, Malaysia, and before them Japan) have been successfully practicing for the past half-century. Their policies resulted in historically unprecedented rates of economic growth, job creation and — indeed — rapid expansion of exports, never equaled in the West for all its free trade and market-oriented policies.

But capturing export markets was a means, and not the main objective, of these industrial policies. At their core, they aimed at domestic employment and the elevation of standards of living.

The point is, critics of the kinds of “free trade” deals they believe are being forced upon citizens are no longer motivated by a fundamental antipathy to trade. Rather, they see trade as only one of a whole panoply of government policies necessary to support the growth of internationally competitive industries — and this is key — offering decent, well-paying jobs for current and future generations.

This is not to say that the process of designing and implementing a national industrial policy is an easy one. All of the Asian countries have made mistakes. But they were able to correct them to ensure their basic results—growth, jobs, and incomes—were being achieved. A good example from Canada’s past is the Auto Pact of the 1960s. Since the 1970s, Canada has swung sharply away from such activist policies.

Rather than scorn the practices of the Asian countries, as we often seem to do, we should be emulating them, if only to provide our younger people and future generations with hope for meaningful employment and income security.

Roy Culpeper is Senior Fellow, School of International Development and Global Studies, University of Ottawa, and a Fellow of the Broadbent Institute.